Is Putin now turning his eyes to the East — and South Korea’s gas dependency in particular?
We have all been preoccupied with the crisis in Ukraine and its concomitant, the supply of Russian gas to that country and much of eastern Europe. But Moscow is also very busy in Asia. Vladimir Putin will be in Beijing next month to sign a gas supply contract and now his government has forgiven North Korea all but $1 billion of its $11 billion Soviet-era debt still owed Russia. The big question now being posed is whether this a gambit by Moscow to both exert greater influence in East Asia — and South Korea in particular, that country being the world’s second largest gas importer — and to deny a market to all the U.S. liquefied natural gas projects now in either planning or development.
In fact, the Washington-based think tank, the Institute for the Analysis of Global Security (IAGS), has published an article with the unequivocal headline “Will Korea be the next Ukraine?”
Get our daily investorintel update
But, first, the two key news reports. Reuters reported that Russia’s parliament had agreed to write off the North Korean debt “to facilitate the building of a gas pipeline to South Korea across the reclusive state”. Then, on Thursday, Pravda published a report headed “Russian bear and Chinese dragon shake paws”. It related to the final stages on the gas supply talks, with only the price to be settled. The Russian news service says China is anxious for more gas so it can reduce coal use, and also air pollution.
But IAGS is especially interested in the Korean story. The debt write-off is seen as paving the way for Pyongyang to agree to a pipeline running from the Russian island of Sakhalin north of Japan through North Korea to South Korea, the Russians delivering 10 billion cubic metres of gas a year. This would see South Korea raise its dependence on Russian gas from the present 6% to 30%. Thus, says IAGS co-director Gal Luft writing in the institute’s Journal of Energy Security, “while the U.S. invests a great deal of political capital in reducing Ukraine’s dependence on Gazprom, its key ally in Asia might soon be heading in the opposite direction”.
Moreover, Russia’s gift to Pyongyang and leader Kim Jong-un is much more than money. “It will effectively usher North Korea into a prestigious club of energy-transit countries — Turkey, Georgia, Kazakhstan, Colombia, to name a few — which serve as energy umbilical cords to economies larger than themselves,” says Luft. Not only will the North Koreans earn sizeable fees for the use of their section of the pipeline but Kim Jong-un will be able to coerce Asia’s third largest economy far more effectively than his missile tests and underground nuclear blasts have done.
Luft says the Obama administration is trying to keep Kim in a box. Putin is throwing the North Korean leader the key to that box. Putin, he argues, is attempting to challenge the existing geopolitical terrain on the Korean peninsula and stick a thumb in Washington’s eye. China, as we have noted, needs with some desperate urgency to tackle its air pollution problem, but it does not have the domestic gas supplies to make a significant switch from coal. And Russia is the only party that has the resources and the proximity to deliver gas in the needed quantities.
Apart from Russia trying to show China how important it is to Beijing, and to throw a wrench into America’s East Asia strategies, IAGS reminds us there is also the commercial aspect. The U.S. is gearing up to become major LNG exporter by the end of the decade. South Korea is seen as one of the key markets for the LNG. But the Russians will, if the pipeline through North Korea is built, be able to supply gas at far more competitive prices than will the Americans.
Luft concludes: “Russia’s recent ploy could therefore pull the rug from under America’s aspiring gas exporters and particularly those currently talking the multi-billion dollar risk of building new LNG terminals in the U.S.”.
InvestorIntel is a trusted source of reliable information at the forefront of emerging markets that brings investment opportunities to discerning investors.